2025 (9) TMI 15 - AT - Income Tax

Assessee not liable for s.14A r.w.r.8D disallowance where no exempt income earned; explanation held prospective

The ACIT, Corporate Circle-1 (1), Chennai. Versus M/s. Hyundai Steel-India Pvt. Ltd.

The ACIT, Corporate Circle-1 (1), Chennai. Versus M/s. Hyundai Steel-India Pvt. Ltd. - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether disallowance under section 14A read with Rule 8D is permissible where the assessee did not earn any exempt income in the relevant assessment year. 2. Whether a rectification under section 154 correcting an error in interest expense and leading to a recomputed disallowance under section 14A is maintainable where the original assessment contained an apparent mistake. 3. Whether the explanation inserted into section 14A by the Finance Act, 2022 operates retrospectively so as to mandate disallowance under section 14A even when no exempt income was earned in an earlier assessment year (AY 2014-15). ISSUE-WISE DETAILED ANALYSIS Issue 1: Disallowance under section 14A/Rule 8D when no exempt income is earned Legal framework: Section 14A provides for disallowance of expenditure incurred in relation to exempt income. Rule 8D prescribes computation methodology for such disallowance, including apportionment and formulae based on investment-related income and expenditure. Precedent Treatment: The Tribunal and the Commissioner (Appeals) relied on the authoritative decision of the Supreme Court which holds that where no exempt income is earned in a year, disallowance under section 14A may not be warranted. Interpretation and reasoning: The Court accepted the factual finding that no exempt income was earned in the relevant year. Applying the statutory text and controlling precedent, the Tribunal reasoned that the statutory purpose of section 14A-preventing claim of expenditure attributable to tax-exempt income-is not engaged when there is no exempt income. Thus applying Rule 8D to compute a notional disallowance where no exempt income exists would be inconsistent with the statutory scheme and controlling authority. Ratio vs. Obiter: This holding is treated as ratio in the present decision insofar as it directly disposes of the controversy in the appeal; it applies the settled rule that absence of exempt income negates the premise for section 14A disallowance. Conclusion: Disallowance under section 14A r.w. Rule 8D was not warranted for the assessment year in question because the assessee did not earn exempt income; the deletion of the addition was upheld. Issue 2: Validity of section 154 rectification correcting interest expense and recomputation of section 14A disallowance Legal framework: Section 154 permits rectification of mistakes apparent from the record in an assessment order. A rectification that corrects a numerical/clerical error which is apparent on record is permissible and may result in recomputation of consequential figures (e.g., disallowance under section 14A). Precedent Treatment: The decision recognizes the principle that apparent mistakes may be rectified under section 154 but subjects such rectifications to the same substantive legal tests applicable to the corrected computation (here, whether section 14A disallowance legitimately arises). Interpretation and reasoning: The Tribunal noted that the Assessing Officer identified an apparent arithmetic/clerical error in the interest expense recorded in the original assessment and issued a section 154 order correcting the figure and recomputing the section 14A disallowance. However, the Tribunal proceeded to test the recomputed disallowance against the substantive requirement of section 14A (existence of exempt income). Since no exempt income existed, even the rectified computation could not justify sustaining a disallowance under section 14A. Ratio vs. Obiter: The Tribunal's treatment is ratio to the extent that it affirms the legitimacy of section 154 for correcting apparent errors but clarifies that a rectified computation must still satisfy substantive law; the ultimate conclusion-that rectification cannot sustain a disallowance where the statutory precondition (exempt income) is absent-is applied as a direct holding. Conclusion: While rectification under section 154 to correct the interest figure was procedurally permissible, the recomputed section 14A disallowance could not be sustained because the substantive condition for disallowance (existence of exempt income) was not met; the deletion by the CIT(A) was therefore affirmed. Issue 3: Applicability of the Finance Act, 2022 explanation to section 14A to prior assessment years Legal framework: Legislative amendments or explanatory provisions are generally construed with regard to their prospective or retrospective effect depending on the language of the amendment and legislative intent. An explanatory note may clarify existing law but cannot be read to alter settled rights in absence of clear retrospective language. Precedent Treatment: The Tribunal addressed the Department's contention that the Finance Act, 2022 explanation to section 14A should be read as clarificatory/explanatory and hence applicable to earlier assessment years, thereby validating disallowances even where no exempt income was earned. Interpretation and reasoning: The Tribunal rejected the contention that the Finance Act, 2022 explanation applies retrospectively to AY 2014-15. It held that the explanation should be construed as prospective in nature in the absence of explicit retrospective intent and because applying it retrospectively would be inconsistent with the settled legal position and the statutory scheme for the year in question. The Tribunal observed that the appellate process must apply the law as it stood for the relevant assessment year. Ratio vs. Obiter: The conclusion that the Finance Act, 2022 explanation is prospective and does not apply to the assessment year under appeal is applied as a ratio for disposal of the present controversy; any broader commentary on legislative interpretation is obiter beyond the immediate facts. Conclusion: The Finance Act, 2022 explanation to section 14A does not apply retrospectively to AY 2014-15; therefore it cannot be invoked to sustain a section 14A disallowance for that year where no exempt income was earned. Cross-references and final disposition Because the Tribunal accepted the factual finding that no exempt income was earned, Issues 1-3 converge: even after rectification under section 154, the statutory predicate for section 14A disallowance was absent, and a later legislative explanation cannot be applied retrospectively to alter that outcome. The Tribunal accordingly confirmed the deletion of the section 14A addition and dismissed the Revenue's appeal.